I apologize for the Debbie Downer lede. I got a little off-track there. Let’s start over.

Today’s title is inspired by Your Money or Your Life. It’s a book that all my favorite and like-minded bloggers recommend as a definitive personal finance “bible.” (Disclosure: I’ve never read it. From what I’ve heard it covers the basics very, very well. After 10 years of personal finance finance blogging (and 25 years studying personal finance), I’m not sure I’d gain too much from it.)

The key takeaway for me is that mortgages were 50% more a month for an extra bedroom. For most people, housing is the biggest expense. You can cut lattes here and there, but they are proverbial drops in the bucket. A 50% change in your biggest expense is life changing…

… life changing in either direction. If you have a 3 bedroom home that you don’t need, you could reduce it and put the savings to good use. If you were thinking of super-sizing from your 2 bedroom home, it’s worth thinking twice whether you really need that 3rd bedroom.

What would do with an extra $450? Decisions, decisions. A-ha there’s the light-bulb above my head.

It turns out that $450 a month is $5400 a year. That’s almost exactly what it takes to max out a Roth IRA. Maybe I should have titled this article your money or your retirement?

Normally, I’d walk you through the math of what $450 more a month means. Today, I’m going to live up to my moniker. Everything I’d say is here: Compound Interest is a River.

For those who aren’t regular readers, here’s a brief back story. I bought a condo in the Boston suburbs in 2005. A few months later, I proposed to my (now) wife and we moved in together. In 2006, she got an unbelievable job offer in San Francisco, so we moved out west. It didn’t make since to sell the place because of the drop of real estate at the time. So I rented it out and continue to do so today.

Every 3 or 6 months, I decide to do a quick review of my net worth. Yesterday was my first look in 6 months. Though personal finance gurus are divded on the subject, I consider the equity in my home as part of my net worth. And my net worth took a big hit. Over the last five years, I’ve become accustomed to the drop. After all, I’ve seen it go from the $287K price I paid to $240 in that time. This time the Zillow estimate was… $193K… Ouch!

I’m sure there are a few of you reading this thinking, “Zillow isn’t an appraisal.” You are right. However, considering my condo is one of many, Zillow’s data on past sales has historically made it very accurate for me. So while there is likely some wiggle room the estimate is probably close.

Rather than dwell on the negative, I’m going to focus on what I learned from the experience. In 2004, I listened to the media. I listened to a lot of people who said, “If you don’t buy now, you’ll never be able to buy. Prices will just keep going up and up forever.” So the lesson I take from this is: Don’t necessarily listen to the crowd. Sometimes they are right and sometimes they are wrong. Gather all the data and think for yourself And now I’m a smarter for having learned that lesson… right?

… well I’m not so sure. The market in San Francisco looks more and more like a “you’ll never be able to buy” situation. Even with prices coming down over the last couple of years, the median home price in my area is around a million dollars. If you listened to the right people in 2000 or 2001 you could have bought in at a more reasonable price and cashed out with a good chunk of money (as long as they are willing to move to a lower cost of living).

CNN has an article about The National Association of Realtors saying that home sales dropped 8.6% in November. That’s a pretty steep drop for just one month. What I take from that is that this may be one of the best times to buy a home. Buyers have not only this information to negotiate with, but also the benefit of the winter off-season. Mortgage rates are low too – though you might have to have pristine credit to qualify for them.

This news of the home sales drop falls on the heels of Fortune announcing the 10 Worst Real-Estate Markets for 2009. Every year is going to have a 10 Worst Real-Estate Market (even if things are doing well), but some of the predicted drops are huge. Nine of them are projected to lose 20% or more and the 10th, Washington D.C. escapes by the slimmest of margins with a 19.9% projected drop.

It may surprise many that the Fortune list had 8 of the 10 worst markets in California. I always knew that California was expensive, but I didn’t expect it to dominate the list as much as it did. I figured that New York City may be in there as financial, premium fashion, and advertising businesses look to have a tough time next year (in my opinion – I have no objective proof of this).

This made me think, how is my rented-out condo in the Boston suburbs doing? I paid $278,000 for it in the summer of 2004. Zillow, which is very accurate for the property, lists it as currently worth $226,000. Ouch. Pain. Since October it’s dropped more than 13%. I’m actually close to being upside down on the mortgage that peaked at around $300,000 in the fall of 2005. For this reason, I can’t take advantage of cheap refinance rates unless I want to put another huge chunk of money into it to avoid private mortgage insurance (PMI). Sad.

If prices turn around instantly (fat chance) and resume a 5% gain that real estate has made in the past (over the long term), it will take me more than 4 more years for the value to catch up to what I paid for it. At that point, it will have been 9 years of home ownership for no gain. Let that be a reminder to all those who say “renting is throwing money away.”

Every so often, I get questions from readers. I’d love to get more (contact me) but sometimes the questions I do get deal with topics that are a little outside my level of expertise. When this happens, I often try to direct the person to place that I think can help them find an answer. It may be a specific blogger that I know writes about the topic fairly often. However, it might be some very helpful forums. I’ve been spending some time on Wesabe Groups and find that there’s a nice community there. While I haven’t spent much time there, I’ve also read a lot about the Get Rich Slowly Forums. These are two places where you can ask questions and get a variety of answers – surely some good and others bad. As always, you’ll have to be your own judge on the best path to choose.

The question that spurred this comes from “Jonathan Papelbon” (a name I’ve picked to protect the original writer’s identity):

I bought a house a year ago, and now Zillow shows that it has lost 12% in value!!! I am paying an interest-only loan for 7 years (6 years left), and I don’t know what to do. Should I start putting money toward the principal so that when I want to sell, I will be able to break even? Or should I continue to put $$ toward other debt and savings? This is not just a decision for me, my wife does not want to be stuck here for too many more years, in case we need to move into a bigger place if we start a family.

I made an attempt to answer the question, but mostly I cautioned him about the dangers of interest-only loans and using Zillow as a guide (though it works well for many properties). The other thing that I wanted to note is that extra money saved in a bank account might be better off than put towards paying off the loan. Why? Well if you use up this buffer and then run into a few bad months, lenders will have no sympathy for you. However, if you can make the regular payments and keep that buffer money for a future rainy day, the lender won’t know it’s raining for you.

This is kind of an open question and I’m sure if we had full information someone could really give great advice. However, perhaps you’ve found something here that I missed. I’ll be the first to admit that I don’t follow interest only loans because I’ve always avoided them. If you have some good ideas please let them in the comments.

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